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Study: How U.S. auto dealers can boost their margins

U.S. dealerships can significantly improve on the industry's average profit margin if they upgrade the capability of sales and service employees and pursue new sales formats, a McKinsey & Co. study concludes.

The average U.S. dealership posted a pretax profit margin of 2.2 percent in 2013, according to the National Automobile Dealers Association. But some top performers already make margins of up to 5 percent, and that level is attainable for the typical dealership that puts in the effort to improve, said Hans-Werner Kaas, McKinsey's senior partner leading the consulting firm's Americas automotive practice in Detroit.

"You can add anything between 2 to 4 percentage points," Kaas said. "For dedicated and committed initiatives, there is no reason why a 4 or 5 percent [return] should not be attainable."

Consolidation pressures

Such improvements will help dealers facing further consolidation of the U.S. dealership network.

While consolidation will be continuous, the pace of U.S. dealership reductions will be evolutionary rather than revolutionary, Kaas said. He wouldn't estimate how quickly the U.S. dealership count will contract or by what percentage or what the count might be in 2020.

There were 17,760 dealerships in the United States at the end of 2012, down 1 percent from a year earlier, according to the Automotive News Data Center. The count has been fairly stable the past few years after big drops in 2008, 2009 and 2010.

To make their retail networks healthier, McKinsey recommends that automakers develop new retail models that can address changing consumer behaviors and shopping preferences, such as the rise of mobile search. More than 80 percent of new-car buyers begin their research online, the consulting firm said, and automakers and dealers still have a lot of room for improvement in the eyes of those customers.

New models

A quarter of car buyers are unsatisfied with their dealership experiences, McKinsey found.

Those consumers are interested in new retailing models, such as service-only locations or test-drive centers that can be shared by multiple dealerships, Kaas said. In a McKinsey survey, consumers also expressed interest in smaller stores in prime city locations, online stores, pop-up stores and home visits by dealers.

While some of those formats are already being used in Europe, Kaas said he couldn't point to examples in the U.S. market yet. Not all those approaches are compatible with the varied state dealer franchise laws in the United States, he said. But Kaas predicted that U.S. dealers and manufacturers will try some of those models, possibly as soon as the next 12 to 18 months.

Any store can improve

Significant profit gains aren't just for bigger dealership groups with deep pockets, Kaas said. While some improvements require substantial investments, any dealership can and should evaluate the skill and motivation level of sales and service employees and make improvements. That can lead to a better customer experience and reduce the need to discount.

"We will have much more differentiated sales and service formats in the future, and not every dealership is a cookie-cutter approach compared to the next one around the corner," Kaas said. "Those who work hard and work with the right tools, they will be rewarded."